Recently I wrote about the differences between buying a single-family home and a mutli-family property, focusing on using that property as a primary residence. But what if you’re considering buying a multi-family home as an investment property? Investment properties are popular right now and can be used to supplement your income. What are the main benefits and drawbacks of buying an investment property?
First, it’s important to note that expected rental income can be used in calculating the mortgage you will be taking on – but only in part. Usually an FHA (Federal Housing Administration) underwriter will only be able to use about 85% of that rental income in considering your overall assets. The rent that you are charging your tenants must also be considered fair and common for the area in which the property is located. You may also be required to show previous rental management experience in order to have your future rental income considered as part of your mortgage application.
Here are a few benefits you might enjoy as a landlord …
- Added Income. If your investment property is located in an area where rentals are lucrative, you could see a great uptick in your overall income on an ongoing basis.
- Tax Benefits. Mortgage payments and your home equity interest could carry some excellent tax advantages. Consult with your tax advisor to find out the details.
- Equity Growth. The equity growth of an investment property is typically fast compared to other means of “forced” savings.
- Relative Simplicity. For properties with up to four units, the mortgage approval process is similar to obtaining a loan for a single-family home. Properties containing more than four units are considered commercial properties and carry a different type of loan process.
… and here are a few drawbacks that you might want to consider.
- Vacancies. It can be hard to keep tenants in the long-term. You will want to consider the location of your property and turnover rates in that area carefully before you make the decision to purchase.
- Collections. What will you do if your tenants won’t pay their rent? You might have to seek legal action against them. Screening your tenants carefully is a must.
- Repairs. When something breaks in your own home, there isn’t necessarily any urgency to fix it if it’s non-essential. But as a landlord, you’ll want to make sure that you have a plan to make repairs in a timely fashion. Minor issues like a drippy faucet or cracked drywall can be easy fixes on your own when you get around to them. But issues like a roof leak may become an expensive problem if left unresolved, so hiring a professional may be in your interest.
- Management. If you don’t live near your investment property, it may be necessary to hire a property management company to keep an eye on the place and assist in renting it when it turns over. If you do so, a property manager will need to be considered as part of your expenses.
Buying an investment property can make sense depending upon your financial picture. To get a good idea of how carrying an extra mortgage will affect your finances, talk to a loan officer to get a clearer idea of whether an investment property could be the right decision for you.